IFA firms should consider their exit strategies now, argues Damian Keeling, managing director of Perspective Financial Group Ltd

It’s safe to say that the Retail Distribution Review (RDR) will have a considerable and far-reaching impact on IFA firms in particular and across the whole financial services landscape when it becomes reality from the start of 2013. What we cannot say at this point is what that impact will truly be we can speculate and wonder out loud however given that the RDR is still being debated it is impossible to be certain.

Indeed, it is not just the industry but the regulator itself that currently seems in the dark about how the final RDR rules might translate into practice. Just last month the regulator’s chief executive, Hector Sants, sat before the Treasury Select Committee (TSC) and entered into a debate about the number of advisers who may leave the industry because of the RDR. TSC member, Mark Garnier MP, suggested that a figure of 30% might feel the need to leave, while Sants suggested the FSA’s research was more inclined to say somewhere between 11% and 30%.

Whatever the figure might be, Sants stressed that any number between 11% and 30% was acceptable, although clearly Garnier thought this a particularly large number of advisers to be leaving, just at the time when perhaps financial advice has never been more needed or in demand. The point is perhaps that the RDR will mean IFAs are much more highly qualified and not in thrall to commission, which should mean that even with lower numbers of advisers, their clients will be gaining a much more professional and higher-quality service.

No-one seems to deny that the IFA world is likely to see considerably less numbers because of the implementation of RDR. However, from an outsider’s perspective this can look like a ‘forcing out’ of huge swathes of advisers, when this is not really the case.

We should not forget that every adviser and every firm they work for still has time to prepare for their RDR responsibilities. Ongoing uncertainty and resistance to the RDR has led to some advisers delaying their qualifications which in turn means there are some IFAs who now have a restricted timescale to be RDR-ready. For these advisers, two years is not enough particularly because of the necessary qualifications that will be required post-2013. The issue of grandfathering is still up for debate, but to our mind it only detracts from the real truism of independent financial advice – that it is right and proper that advisers are qualified to the highest possible levels and that all advisers should be qualified to the same standard in order to provide a consistent and quality level of advice. Clients should expect and demand this from their advisers. Therefore, the financial services profession must make this move as quickly as possible and to our mind the RDR seems to have the timescale just about right.

Of course what it does mean is that some IFA proprietors will not wish to make this move, however, they will still have a business that is profitable and could still work in the new RDR environment. This is a strong position and, to this group of individuals, leaving the industry is in no way being forced upon them instead exiting the market can de done on their terms and they can make sure they achieve all the outcomes they want to from the exercise.

This is an important point and has not yet been grasped by all. At some stage, unless of course they are of the ilk that wish to be carried out of work in a box, the business owner will be thinking about how they exit the business. They may have been thinking about it for a while or it could well have been the RDR and its implications that have brought it to the forefront of their minds much more recently. Whatever, the reason, we would suggest that now is exactly the right time to be thinking about an exit strategy, particularly if they wish to leave when RDR begins, or even if they want to maximise the capital value in the business today but also have the option to stay on beyond 2013 (qualifications dependent of course).

At this time, consolidation makes sense and there are businesses like Perspective who are actively purchasing IFA firms. This period may not last forever and, given that all firms who are purchased, will also need to be made RDR-ready, the timescale could work against some of those looking to exit. In essence, the longer the firm leaves the exit decision, the shorter time they have to get ready for the RDR. This subsequently means it will cost the consolidator more to get the firm up to speed, and therefore the more likely the purchase price of the firm will be reduced to meet these extra costs.

For example, we operate a two-year earn out period for firms with 50% of the purchase price paid up front, 25% paid at the end of year one and 25% at the end of year two (dependent on targets being hit, etc). This means that with just over two years to go until 2013, owners could potentially be leaving it too late to maximise the value of their business if they delay their exit decision further. Ensuring the best price for a business is a bit like good comedy, it’s all in the timing.

Overall though it is important to acknowledge that leaving an industry is not always a bad thing for those concerned. Leaving on your own terms can be the right option. At the end of the day, the number of IFA firms conducting business post-RDR will not be of concern for those able to achieve everything they want to out of leaving the sector. There are businesses that will offer this option and will take the strain away from RDR compliance, while still offering an opportunity to stay in situ post-2013 if that is what the owner wants.

Therefore we believe that all owners should take the time to consider their exit options now regardless of whether they wish to take their leave next year, in two years’ time or even further ahead. The RDR provides a fork in the road for IFA firms and it is important the map is consulted now before the direction has to be chosen. Certainly, no-one wants to leave it too late and miss the turning and if there are options to get off the road early, they should also be considered fully before doing so.